Help to Buy Mortgages

The UK government launched the Help to Buy scheme in April 2013, initially to help first-time buyers and home movers get a leg-up on the property ladder.

With soaring property prices and near frozen wages, many were stuck in a cycle of renting which ate away at any chance of saving a 20%+ deposit, leaving them with little to no prospect of buying a home. Help to Buy offered an interest-free (for five years) equity loan up to 20% of the value of the property, or (since 2016) up to 40% for homes in London. The Help to Buy scheme is bigger than any previous government housing initiative and has shone a spotlight on affordable housing. More than 211,000 homes have been bought using the scheme, with over a third (37%) of people saying they could not have bought a new property without it, and around 80% saying it allowed them to buy more quickly1. The scheme’s end date is March 2023, by which time Homes England expects to have loaned around £29 billion, supporting the purchase of 462,000 properties2. An earlier change will see the scheme exclusively available to firsttime buyers from 2021. There are also regional differences in the availability and costs of Help to Buy around the country which are covered in this guide

How Help to Buy: Equity Loan works

With Help to Buy: Equity Loan, first-time buyers as well as existing homeowners receive an equity loan from the government in order to buy a new build property worth up to £600,000. Buyers will receive assistance from the Homes and Communities Agency (HCA) who use a firm called Target to run all administrative duties.

These homes cannot be sublet, your old home cannot be part exchanged and you cannot own any other property when purchasing your new home. The loan itself has to be repaid by the end of the mortgage term - 35 years being the longest term you can borrow for under the scheme. The loan can be paid off either in a lump sum, by incremental payments known as ‘staircasing’, or when selling the home.

How interest rates are applied

Home buyers under the scheme will not pay any interest or fees on the government’s equity loan for the first five years. In the sixth year, the interest rate is set at 1.75%, after which the fee rises with inflation based on the Retail Price Index (RPI) plus 1% each year.

What happens when you sell your home?

You can sell your home at any time, both the Equity Loan and mortgage will need to be repaid upon completion of the sale. You’ll need to contact the National Post Sales Agency who will appoint an independent valuer to decide the value of your property. Your property should be sold on the open market at the prevailing market valuation.

If you do sell your property for more than the prevailing market value then the amount due to Homes England under the equity loan will be their percentage value of the actual sale price. Homes England will not agree to release its charge over the property for sales at less than market value. If there are any fees or interest outstanding, for example, interest arrears at the time of selling, these must be paid before the sale is completed. Remember there is plenty of assistance available - let Target know once you have a valuation and they will advise on what happens next. When you sell your home, or the mortgage is paid off, you will have to repay the equity loan plus a share of the home’s increase in value.

What if the value of the property falls?

When you sell your home, if you haven’t already repaid the Help to Buy equity loan, you will only repay a percentage of the market value equal to the percentage of assistance received. You will therefore pay back less than the amount you borrowed. This also means that if your property increases in value, you’ll pay back a larger sum than you borrowed.

What is a Help to Buy Agent?

Help to Buy agents are appointed by Homes England and are available to guide you through the scheme’s options; they’ll explain how the eligibility and affordability criteria affect your specific circumstances. While they administer the Help to Buy: Equity Loan scheme, they do not cover the mortgage guarantee scheme. They therefore have the authority to authorise your purchase of a home under the equity loan scheme.

What types of Help to Buy schemes are available?

Help to Buy: Shared Ownership

Shared Ownership is available to those who cannot afford a mortgage on 100% of a home. Instead, they buy a share of a home (between 25% and 75% of the home’s value) and pay rent on the remaining share to a housing association (usually at 3% per year). You have the opportunity to buy more shares in your home, known as ‘staircasing’. You could buy a home through Help to Buy: Shared Ownership in England if: • your household earns £80,000 a year or less outside London, or your household earns £90,000 a year or less in London • you are a first-time buyer, you used to own a home but can’t afford to buy one now or are an existing shared owner looking to move.

Forces HTB

Forces Help to Buy allows Armed Forces personnel to borrow up to 50% of their salaries interest free to fund the deposit for a house. The maximum loan is £25,000 to be repaid over 10 years. The scheme comes to an end in December 2019, at which point it’ll be reviewed.

The Help to Buy ISA explained

The Help to Buy ISA is a savings pot designed to help first-time buyers save a deposit for their home. The government adds 25% to your savings, up to a maximum of £3,000 on savings of £12,000.

To qualify for a Help to Buy ISA, you must:

• be 16 or over • have a valid National Insurance number

• be a UK resident • be a first time buyer and not own a property anywhere in the world

• not have another active cash ISA in the same tax year. Although if you have opened a cash ISA this tax year, you can open a Help to Buy: ISA but will have to take additional steps.

To qualify for the government’s 25% bonus, the property you want to buy must:

• be in the UK • have a purchase price of up to £250,000 (or up to £450,000 in London)

• be the only home you will own • be where you intend on living

• be purchased with a mortgage

Important note: The Help to Buy ISA will come to an end in November 2019. However, existing holders will have until 1 December 2030 to claim the government bonus.

The Help to Buy ISA alternative: LISA

A Lifetime ISA (LISA) offers the same 25% government bonus as the Help to Buy ISA, but there are some key differences:

1) LISA holders get a bigger bonus With a Lifetime ISA, you can add up to £4,000 each tax year until your 50th birthday. That’s up to £1,000 in bonuses every year whilst you can contribute. The H2B ISA, on the other hand, has lower maximum contributions meaning you can only receive a bonus of up to £3,000 in total.

2) LISA offers more choice You can use the Help to Buy ISA to buy a home worth up to £250,000 (or £450,000 in London). With a LISA, the limit is a home worth £450,000, even outside of London. The LISA also gives you the choice to save as cash or invest in stocks and shares, while Help to Buy ISAs only allow you to save as cash.

Investing in the stock markets gives you the chance to make more money than cash alone. But it also carries more risk. Unlike the security offered by cash, all investments can go down as well as up in value so you could get back less than you put in.

3) LISA gives greater flexibility After a first lump sum payment of £1,200, you can only save monthly into the H2B ISA, capped at £200 a month. With the LISA, you can choose to save monthly or in lump sums. As long as you keep within the £4,000 limit, you can save as little or as often as you like.

4) Restrictions Due to the greater benefits of the LISA over the H2B ISA, there are stricter rules on withdrawing money. If you decide to make a withdrawal from your LISA and it’s not to purchase your first home or after the age of 60, a 25% government charge will normally apply so you could get back less than you put in. Also, the LISA must have been open for 12 months before it can be used towards your buying first home without the government charge being applied. Neither of these conditions apply to the Help to Buy ISA.

FAQs

With the new Help to Buy scheme due to commence in April 2021 and the recent government announcement of an extension to the current Help to Buy scheme, this has led to many having questions regarding current and future applications to the scheme.